4/28/2011 @ 6:00PM

The Cloner

Wang Xing was 26 years old and already the founder of a failed Chinese takeoff of oncehot Friendster when he cloned Facebook. It was December 2005 in Beijing, and Wang and two friends had made an excellent copy. Xiaonei would quickly become the most trafficked Chinese version of Facebook, but less than a year in, forced to borrow money from his parents to keep it going, Wang sold his first success for several million dollars.

He and other friends next copied Twitter. Fanfou would become China’s highest-profile Twitter clone, but it was taken off line by the government after the Xinjiang riots of July 2009 and would not return for more than a year. Meanwhile Xiaonei flourished under its new owners and its new name, Renren; it will soon be valued at more than $4 billion in a highly anticipated U.S. IPO.

Undaunted, Wang and his Fanfou friends cloned again, launching Meituan, a copy of the crowd-discounting business Groupon, in March 2010. It is one of the two highest-grossing Chinese Groupon clones, with more than $12 million a month in coupon sales, Wang says, and is on the verge of closing a $50 million-plus round of funding with investors such as Sequoia.

Meituan is Wang’s best chance to cash in big on a career of duplication. But to make it, ironically enough, he will first have to defeat an armada of fellow clones, an estimated 3,000 Chinese group-discounting businesses that have sprung up in just one year in cities all over the country, including up to a dozen strong national competitors.

The other leading clone, Lashou, just raised $111 million and spent $10 million on marketing in March–right as the original Groupon joined the scrum, in a richly funded joint venture, Gaopeng, with China’s largest social networking company, Tencent. Another competitor has, in classic Chinese fashion, grabbed some market share in part by cloning the domain name, Groupon.cn.

The war to become the “Groupon of China” has become an expensive arms race, turning Groupon’s enviable cashflow model inside out: The cash is flowing out to chase customers and personnel, and victory may yet be defined by who can bankrupt whom first. The intense competition has raised the cost of setting up sales teams in more than 100 cities, while cutting into the take that the clones can claim from each coupon sold for restaurant meals, movie tickets and the other services that are the bread and butter of crowd discounting. Meituan’s take is now down to a high single-digit percentage of each coupon sold, from 20% at first, Wang says, and the other competitors are taking under 10% as well (Groupon generally takes a 30% or higher slice in the U.S.).

Groupon, lined up behind the Samwer brothers (the leading European Web cloners), has fueled the arms race this year with Gaopeng. Oliver Samwer met in October with Wang and the other heads of the leading Groupon clones, and according to some of them, his message was arrogant, patronizing and warlike: Surrender (agree to be acquired) or be defeated. Conveniently for the clones, this caricature conforms to a well-worn stereotype of the marauding Western Internet giant marching into China, confident of victory, and failing: eBay, Yahoo! and Google all ultimately surrendered. But first Groupon is going on a hiring and marketing spree, raising the cost of doing business in a niche already employing tens of thousands.

Instead of surrendering, the clones have bumped up their advertising budgets. Lashou will spend at least $30 million this year. So will Groupon.cn, the popular dining site Dianping and Nuomi, the group-buying wing of Wang’s former Facebook clone, Renren, say China’s 21st Century Business Herald. Wang himself has a more modest, online-focused strategy that the Business Herald says will cost Meituan 130 million RMB, or $20 million. But he is still burning through $1 million in losses a month on about the same amount in revenues (Meituan’s take from $12 million in coupon sales).

The obvious near-term winners in all this are the advertising companies. The long-term prize for the clones might be lucrative, the gargantuan Chinese consumer market. Wang projects more than $30 million in monthly coupon sales for Meituan by December and claims that in five years his company could grow to 100 times its current size, which would mean $15 billion a year in coupons sold.

But it is unclear if the stand-alone group discounters will live by economies of scale or die by them. Wang is learning that cloning businesses is easy–far too easy in China–but cloning success is no sure thing.

Appropriately enough, Wang Xing is a programmer cut right from the mold. Slight of build, soft-spoken, bespectacled, a graduate from China’s MIT, Tsinghua University, who also studied in the U.S., he could be the CEO of any of hundreds of Chinese startups. Born in coastal Fujian Province in 1979, at the dawn of China’s reform and opening, Wang is also the son of a serial entrepreneur, a farmer who speculated in flowers, worked in construction, became a mining boss and finally got into cement.

In middle school in 1992 Wang took an interest in computers, working on, naturally, a clone of an Apple II computer. About a year later his parents bought him a clone of a PC. Most of the country had no access to the Internet yet, but in the mid-1990s he bought a modem and dialed long-distance to bulletin boards in Shenzhen and Guang – zhou run by men who would become Internet titans, among them Tencent’s Pony Ma.

“It’s a tool, and it’s a toy,” Wang says of his fascination with the computer. “And sometimes it can be a weapon.” He was pursuing a doctorate in engineering at the University of Delaware when he discovered Friendster in 2003. Once he saw social networks on the Internet, he decided to leave early and go back to China. “I was very excited about social networking. Because I studied computer networking,” Wang says. “I saw this is going to be the new infrastructure of how information flows, above computer networks.”

His first effort at building a social network with his friends in 2004 wasn’t an exact clone of Friendster, which was the problem: “The original concept came from Friendster and social networking. But the look of the Web site is original. And pretty ugly.” It failed.

By the summer of 2005 Wang and his friends, one from Tsinghua University and one from high school, were planning another site, a college social network. Using his University of Delaware e-mail address, Wang had gotten an account with what was then The Facebook. With Xiaonei they copied The Facebook precisely.

“At that time we were still three people and no designers. We were all engineers,” Wang explains. The cloner was born. Less than a year later, unable to raise money or cope with rising expenses, Wang agreed to sell Xiaonei to Oak Pacific Interactive. Wang does not disclose the sum, but it was perhaps $4 million. Whatever the price, the deal proved to be a steal for Oak Pacific.

Copying Western Internet businesses is an oft-beaten path to success in China, where the large customer base, the language barrier and political obstacles for foreigners make it a promising market for domestic players. Groupon is especially conducive to cloning because it generates cash flow from day one, and the Chinese market already had experience with group-buying specials long before Groupon started in the U.S. But the Chinese market also loves to replicate potentially profitable businesses, both offline and online, until competition threatens to bury the whole lot. This leaves stand-alone sites vulnerable to profitable Internet conglomerates like Tencent and Alibaba Group.

The group-buying marketplace is rife with scandal stories about exaggerated sales or, worse, dissatisfied customers. Big names like Lashou and Meituan take the brunt of the bad publicity, including a national television expose on “consumer day” in March that attacked both. (Wang won some praise for appearing on TV after that show to address the “tricks” of the group-buying business.)

Still, investors are willing to reward market leaders, even if they lose huge sums to get there. Witness Youku.com, a stand-alone video site with many competitors and distant expectations of its first profit; it is worth more than $6 billion on the New York Stock Exchange.

Copy That

Groupon’s deal-a-day group discount business model has been copied around the world but nowhere more vigorously than in China. Meituan was among the first.

GROUPON (FROM “GROUP COUPON”)

Founder: Andrew Mason, 30, born in Pittsburgh, Pennsylvania.

Employees: 6,000.

Projected coupon sales for 2011: $3 billion to $4 billion.

Revenue share from coupon sales: 30% to 50%.

Recent deal: Bus ride from New York to Washington, D.C. for $10, valued at $20.

MEITUAN (MEANING “BEAUTIFUL GROUP”)

Founder: Wang Xing, 32, born in Longyan, Fujian Province.

Employees: 1,400, plus 300 franchised sales agents throughout China.

Projected coupon sales for 2011: $150 million to $230 million.

Revenue share from coupon sales: Less than 10%.

Recent deal: Japanese meal for two in Beijing for $26, valued at $106.